The Hidden Danger for Donald Trump in the Economy’s Growth Spurt

It is at least conceivable that, in the coming years, Donald Trump could fall victim to an economic boom-bust cycle of his own making.

Photograph by Brendan Smialowski / AFP / Getty

Donald Trump and other Republicans are still busy touting last week’s G.D.P. figures, which showed that the economy expanded at an annualized rate of 4.1 per cent between April and June. Speaking in Tampa, on Tuesday night, Trump claimed, “We have the best economy in the history of our country.”

That was blatantly false, of course. On many occasions, the U.S. economy has been better, and has grown faster, than it is now. And there are reasons to be cautious about the long-term significance of the latest G.D.P. figure. For one thing, it was boosted by a number of one-off factors, including a surge in soybean exports as farmers rushed to beat the imposition of Chinese tariffs. There is also little sign of the boom in business capital investment that supporters of last year’s big G.O.P. tax cuts promised. And, with Trump still threatening to expand his trade war with China, there is a good deal of uncertainty about where things will go from here.

But it’s worth considering what might happen if this growth spurt persisted for a while, which—given higher spending by consumers and government agencies—is not beyond the bounds of possibility. The tax cuts that Congress approved in December, along with the spending increases it approved in February, amounted to a sizable Keynesian stimulus package—Republican paeans to the merits of small government notwithstanding. According to analysts at the Peterson Institute for International Economics, the tax cuts and spending increases will add about two hundred and seventy-six billion dollars in spending to the economy this year, or about 1.4 per cent of G.D.P. Many economic forecasters are now raising their estimates for the rest of the year. Goldman Sachs’s tracking estimate for G.D.P. growth in the third quarter is 3.4 per cent. The Federal Reserve Bank of Atlanta’s “GDPNow” estimate is five per cent. Macroeconomic Advisers, a leading economic consultancy, is predicting G.D.P. growth of three per cent for all of 2018, which would be the highest figure since 2005.

Going into the midterm elections, a higher rate of growth is obviously a positive thing for the political party in power, although history suggests that it won’t necessarily be enough to preserve the Republican majorities in the House and Senate. Consider what happened in 2014. Despite annualized G.D.P. growth of 5.1 per cent in the second quarter, Republicans took control of the Senate from Democrats and enlarged their majority in the House. A big problem for Republicans this year is that, so far, the pickup in G.D.P. growth hasn’t led to a rise in wages. When you take into account price inflation, hourly and weekly earnings are basically unchanged from this time last year. The biggest beneficiaries of Trump’s and the G.O.P.’s policies have been owners of capital—investors and senior corporate executives who have used the savings from the tax bill to buy back more of their companies’ stocks.

It’s telling that Trump and his political advisers seem determined to make the election primarily about wedge issues, such as immigration and “the Wall,” rather than the economy. They know that they have a difficult fight ahead. The polls show that Democrats have a good chance of taking the House, while the Senate looks like a toss-up. If the G.O.P. loses next week’s special election in Ohio’s Twelfth Congressional District, which it has held for thirty-five years, it will be another alarming sign for the Party. And it’s surely significant that in a last-minute ad blitz for the embattled Republican candidate, Troy Balderson, the G.O.P.’s Congressional Leadership Fund chose to focus on Nancy Pelosi rather than the economy.

Of course, the midterms aren’t the only elections on the horizon. An intriguing question is what the current growth spurt means for the prospects of Trump getting reëlected two years from now. The general rule is that higher rates of G.D.P. growth help incumbents. But many economists suspect that the recent good news could well be paving the way for a significant slowdown, and quite possibly a recession, in 2020, as the boost from tax cuts and higher government spending fades. It is at least conceivable that Trump could fall victim to a boom-bust cycle of his own making.

Back in March, before the effects of the stimulus package were being reflected in the official statistics, Macroeconomic Advisers published a report titled “How Might the Expansion End? Boom and Bust Is a Real Risk.” The authors, Joel Prakken and Chris Varvares, note that G.D.P. growth “could turn out to be significantly stronger than currently expected, especially if improved business confidence contributes to a dose of positive ‘animal spirits’ resulting in more investment and hiring than is currently expected.”

Prakken and Varvares speculate that quarterly G.D.P. growth could rise to five per cent by the end of 2018, and that the unemployment rate could fall to below 2.5 per cent by the middle of 2019. In this scenario, as employers competed for workers, wages and price inflation would pick up, prompting the Fed to raise the federal funds rate to 5.5 per cent by late 2019. Together with the phasing out of the fiscal stimulus, that could cause a big fall in the stock market and, eventually, a recession. The report emphasizes that this is just one possible future, but it adds, “We view this Boom/Bust scenario as a highly plausible way for the current expansion to end.”

When I spoke to Prakken, on Thursday, he said he put the probability of such a scenario playing out at about twenty-five per cent. But he also emphasized that even if the “boom” part of the scenario doesn’t materialize—i.e., G.D.P. growth and inflation don’t pick up further from here—there are dangers ahead for the economy. By the end of next year, the stimulus will be phasing out, and the Federal Reserve may well still be raising interest rates. On top of that, current law calls for a return to the sequestration of spending in 2020, which would amount to a significant fiscal contraction. “There’s clearly a point of vulnerability out there,” Prakken noted. “The policy mix could shift in a recessionary direction in late 2019 and early 2020.” There’s also the possibilities of higher oil prices and intensifying trade conflicts. “All of those things would accentuate the bust part of the boom-bust cycle,” Prakken said.

He isn’t alone is expressing these types of worries. Outside of a few redoubts of supply-side economics, such as the White House, the consensus among economists is that the effects of the stimulus will be strictly temporary, and that, once it fades, over-all economic growth will slow sharply. In the latest quarterly survey by the National Association for Business Economics, two-thirds of the economists surveyed saw the next recession starting by the end of 2020.

To be sure, the gloomy economists could be proved wrong. Economic forecasting is an imperfect science, and its relationship to political forecasting is even more imperfect. Even if a sharp downturn does materialize in 2020, Trump could conceivably ride a wave of jingoism, resentment, and voter suppression to another victory in the Electoral College. But the economy is important. And the key point is that, two years from now, things might look very different than they do today.